What happened in the markets - 31 July - 4 Aug 2023
Introduction
After a robust July, the major U.S. stock indices faced a downturn at the start of August. The decline was driven by rising Treasury yields and an unexpected downgrade of the U.S. government's credit rating by Fitch. Among these indices, the Nasdaq Composite, renowned for its tech-heavy focus, experienced the most substantial losses throughout the week.
The week remained abuzz with a flurry of corporate earnings releases, with particular attention directed towards tech giants Amazon and Apple. Both companies reported their earnings after Thursday's market closure. Amazon's performance soared above expectations, attributed to strong results in its core retail operations. This impressive showing led to a remarkable 9% surge in the company's stock during Friday's opening trading session. Conversely, Apple's stock faced a dip of around 3% following a mixed earnings report. While the services division showcased strength, disappointing iPhone sales contributed to the decline.
Investors eagerly awaited insights from major central banks concerning potential market directions after the summer hiatus. However, recent Research Weekly findings reveal that these central banks offered limited guidance, leaving the market in a state of uncertainty. Their updates have left us with a sense of anticipation. In the forthcoming weeks, close scrutiny will be given to data analysis as we assess the progression of disinflation across various global regions.
Key Takeaway This Week
Guess what? The Federal Reserve (Fed) and the European Central Bank (ECB) have been hitting the rate-hike dance floor, but it looks like they might be wrapping up their moves for now.
Ready for a mix? There's a whole lot of goods out there, but the demand's taking a breather. Brace yourself, this could mean prices might shimmy down for a bit.
Hang tight! Treasury yields decided to take the roller coaster - soaring up to nearly 4.20% from 3.95% in a week, then taking a little dip to around 4.05% after the job report strutted in. 🎢
From the S&P 500 block: around 84% of companies have spilled the beans on their Q2 2023 earnings. A strong 79% of these have beaten their estimated net income figures, per FactSet's data. But, hold up, overall earnings are expected to drop around 5.7% compared to last year – the biggest slump since Q3 2020. 📉
Surprise alert! Credit rating agency Fitch pulled a move we didn't see coming. They just downgraded the United States' credit rating from AAA to AA+. Why? Well, the debt ceiling drama and worries about piling federal debt played a role. Fitch thinks all this has dented the governance game. 🏛️
Central banks relying on data but unlikely to raise rates further
As anticipated, both the US Federal Reserve (Fed) and the European Central Bank (ECB) enacted rate hikes of 25 basis points, aligning with widespread expectations. However, financial markets seeking insight into future developments were left unsatisfied. Given the advanced stage of the rate hike cycle, already high base rates, and considerable uncertainty regarding inflation prospects, both central banks refrained from making preemptive commitments. Instead, they highlighted their intention to make decisions on a meeting-by-meeting basis, guided by incoming data.
Analysts hold the belief that neither the Fed nor the ECB will continue raising rates, effectively concluding their respective rate hike cycles. Analysts anticipate a terminal rate of 5.5% for the upper range of the Fed funds rate and 4.25% for the primary refinancing rate within the eurozone.
US growth revised upwards in view of slowing price pressure
Even as inflation maintains its perch above the target and takes gradual steps downward, our view is that this trend is set to keep on trucking. The market's been soaking in a good supply, and a slowdown in credit speed has taken a toll on demand, resulting in a price dip. Vital indicators like the purchasing managers' indices are waving a "cooling off" sign for US growth and even hinting at a slowdown in the eurozone.
Now, brace yourself for the twist: the case for higher interest rates to hang around a while is quite strong. Especially in the US, the boost in real incomes could jazz up demand over the next few months. The US GDP isn't showing its nerves; Q2's results were a sweet surprise. Our forecasts? We've given 2023 a slight lift to 1.9% and 2024 gets a 0.5% bump. This shift gives a nod to a smoother economic slowdown, dialing down the 12-month recession risk from 50% to 30%. Still, a disruption in the banking sector is a lurking possibility.
Let's talk European Central Bank (ECB) now. There's a whisper about another rate hike in September. Some ECB council members think it's the anti-inflation medicine. This sways our thinking that the ECB will hold the line with rates. But here's the kicker: the ECB's communication vibe was friendlier than anticipated, making the euro (EUR) do a little dip. Meanwhile, the US dollar (USD) got a cheer-up from a sunnier growth outlook. 📈
Treasury yields jump higher
The yield on the 10-year U.S. Treasury note had a little adventure - it climbed up from 3.95% last week's close to about 4.20% early on Friday. But hey, it chilled out to around 4.05% after the job report joined the party. 📊
The Treasury Department's plans to issue more seemed to be the reason for the earlier yield bump this week. Tax-exempt municipal bonds started August on a weak note, doing a little dance in sync with the wider Treasury sell-off. Even though August's reinvestment cash and lower supply tried to give a boost, interest rate ups and a quiet macroeconomic vibe kept things in check. That led some primary market deals to tweak their moves due to not-so-great demand.
Jumping to the investment-grade corporate bond scene - guess what? Our traders spotted loads of demand, like people craving more of those bonds. But hold on, the high-yield corporate bond party took a step back thanks to the whole Fitch-downgrading-U.S.-debt mood. Even though new deals were popping up, investors had their pickiness mode on. Some issues didn't get much love, while the top-notch ones were the stars of the show. 🌟
Weekly market stats
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalisation. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price's presentation thereof.
What to look out for in August
With August potentially bringing higher volatility due to lower liquidity, experts like VanCronkhite are advising investors not to lean too heavily on historical trends. Unusual events in recent times have shaken up traditional patterns, so past performance might not be a reliable compass.
Peering into the future, it's wise to remember that interest rate policies might swerve from their old tracks. The Federal Reserve (Fed) might not jump into quick rate cuts like before or stick to near-zero rates post-crises. To tackle this, VanCronkhite suggests focusing on companies with their demand baked in or those riding growth waves, especially in insurance, industrials, and consumer staples sectors. Companies that don't ride the Fed rollercoaster for demand could be golden.
Carol Schleif, the Chief Investment Officer at BMO Family Office, drops a note of caution about overdoing it in the tech aisle. While recognizing the tech giants' impressive growth and values, she suggests trimming holdings to lock in gains, all while keeping a foothold since these big players are diving deep into promising tech like artificial intelligence, set for long-term wins.
As the economy finds firmer ground, Ladner nudges towards the cyclical side of the market. Think small-cap stocks and sectors cozy with economic growth, like materials or energy. And hey, if the recession clouds clear, parts of the market that didn't fully catch the rally might spring back into action. 🚀
Source: Julius Bär, John Hancock Investment Management, T.RowePrice, Forbes, SFGate
